Tuesday, August 23, 2011

Don't say you weren't warned

Everyone talks about bubbles as if they are undetectable until they burst. From the recent housing and Internet bubbles back to the (silly) Dutch tulip bubble of 1637, seemingly rational people get swept up in these financial fads, then get seriously hurt when they collapse.

But just because we're coming out of a recession doesn't mean we're not in a bubble - or bubbles - now. The price of gold has gone up once again - and any investor worth his salt knows previous metals are volatile and unpredictable. Taking into account long-term performance, gold has not been a good investment choice historically. Yet, you can still profit off an irrational investment during a craze by adapting to the situation, just as long as you're lucky enough to cash out before the crash.

So with the combination of popular risky adaptive strategies that make money, how can anyone argue that gold is not a bubble?

But that's not the only one, and unfortunately, while the gold bubble is only being pushed by Glenn Beck, the higher education bubble is being pushed by everyone - the public school system, student grants, employers and parents.

College tuition has been steadily rising for decades beyond the rate of inflation. Students are told if they make this inflated purchase, they will be able to collect higher paychecks for the rest of their lives - a promise that is routinely being broken. It's a bubble alright.

Or as Sarah Lacy put it in a summary quote I stole from The Economist:

Like the housing bubble, the education bubble is about security and insurance against the future. Both whisper a seductive promise into the ears of worried Americans: Do this and you will be safe. The excesses of both were always excused by a core national belief that no matter what happens in the world, these were the best investments you could make. Housing prices would always go up, and you will always make more money if you are college educated.
These inflated tuition - which I believe are caused by the abundance of money supplied by loans and grants - are being squandered frivolously by schools. Maybe higher education needs its own Moneyball-style visionary to come in and teach students out of decade-old math, Latin and classic literature textbooks, hire competent instructors who don't work on research projects and skip the marble stairwells and organic cafeteria food.

The collapse of the higher education bubble will happen - and it may be coming a lot sooner than anyone expects.


  1. Perhaps instead of decade-old math, Latin and classic literature textbooks - they can just use the abundance of free intellectual capital available online.

    I think the 21st century is one for the autodidacts too. Perhaps one can find a way to certify independent students' studies.

  2. Gold can be sold off abruptly. The same cannot be said of a higher education.

    I think what we're more likely to see is a higher valuing of graduate school. It is already happening, really - anyone who wants to stand above everyone else needs to continue their education to the next level.

  3. A higher valuing of grad school for students, yes, but a lowering value for employers.

    Education has become an arms race.

  4. Legendary tulip bubble is a more apt term. Just days after reading this post, I again see the tulip bubble mentioned in a book, "Against the Gods". Basically a book on the history of risk and it's management.

    Neither are the first time I've read about the bubble, and neither will be the last I'm sure

  5. Gold is been seen more as a stable medium of exchange, in a world of cheap money, meaning it is not being really priced as an asset. Gold mining stocks have not gone up as much as gold, this means that their are plenty of people that are scared of investing in gold for long term, in bubbles, people think the prices will continue to rise and would have invested in those stocks. A very bearish thing for gold would be if real interest rates were to raise but Bernanke has committed to keeping them low. Also, Goldline's annual sales are about $500 million, a rather small part of the gold market, and remember the gold they sell is highly overpriced. Beck's audience is hardly bidding golds price up.